China's Debt Bubble

If somebody thinks that the next crisis "will" be from China then he/she is wrong, because China is already in crisis. Their industrial infra will collapse if they don't stay competitive in coming 4-5 years, Indonesia, Vietnam, Bangladesh & India are already leveraging the benefit of lower cost and China is losing its only advantage of being a low cost manufacturing hub. CPC is trying their best, from last 6-7 years to create a consumer base which can help in survival but that is not reflecting and this has created the so called "Chinese Debt Bubble" which will burst if CPC doesn't bring out some big package, which will further hurt their Forex.

Remember one motto of economics, "The faster your economy grows the faster it will mature/saturate". CPC just didn't understood this principle and started following growth numbers, which btw are also fake.

The first time we laid out the dire calculations about what is perhaps the biggest mystery inside China's financial system, namely the total amount of its non-performing loans, by former Fitch analyst Charlene Chu we called it a "neutron bomb" scenario, because unlike virtually every other rosy forecast the most dire of which topped out at around 8%, Chu argued that the amount of bad debt in China was no less than a whopping 21% of total loans.

Corporate investigator Violet Ho never put a lot of faith in the bad loan numbers reported by China’s banks: crisscrossing provinces from Shandong to Xinjiang, she’s seen too much - from the shell game of moving assets between affiliated companies to disguise the true state of their finances to cover-ups by bankers loath to admit that loans they made won’t be recovered. The amount of bad debt piling up in China is at the center of a debate about whether the country will continue as a locomotive of global growth or sink into decades of stagnation like Japan after its credit bubble burst. Bank of China Ltd. reported on Thursday its biggest quarterly bad-loan provisions since going public in 2006.

Charlene Chu, who made her name at Fitch Ratings making bearish assessments of the risks from China’s credit explosion since 2008, is among those crunching the numbers. While corporate investigator Ho relies on her observations from hitting the road, Chu and her colleagues at Autonomous Research in Hong Kong take a top-down approach. They estimate how much money is being wasted after the nation began getting smaller and smaller economic returns on its credit from 2008. Their assessment is informed by data from economies such as Japan that have gone though similar debt explosions.

While traditional bank loans are not Chu’s prime focus -- she looks at the wider picture, including shadow banking -- she says her work suggests that nonperforming loans may be at 20 percent to 21 percent, or even higher.

The chart below shows just how much of an outlier Chu's stark forecast was in comparison to her peers, and especially the grotesquely low and completely fabricated official number released by the banks and the government.

To be sure, it has always been in Beijing's best interest to keep true NPL data well-hidden by everyone from the lowliest bank teller to the Politburo, who all know that merely the recognition of the problem would be sufficient to spark if not a full-blown panic then certainly accelerate capital outflows form the nation to an unstoppable degree.

Another problem with making estimates of adequate collateral protection in China, one which makes such a venture more complicated than solving the proverbial riddle, wrapped in a mystery, inside an enigma, is that the very premise of collateralization in the world's most populous nation is nebulous. Recall that one of the biggest scandals in China in 2014 was the realization (as many had warned previously) that millions of tons of commodities were rehypothecated countless times, and thus "pledged" as collateral to numerous counterparties, and that as a result these same counterparties were unable to make sense of who owns what at one of China's largest ports, Qingdao. In this context, it is safe to assume that loss given default rates in China are if not 100% (or more, which is impossible in theoretical terms but in practice is quite possible, as another curious side effect of unlimited collateral rehypothecation), then as close to it as possible. In early June, Reuters published an expose on China's "Ghost Collateral" reminding China watchers that this most insidious phenomenon is anything but gone.

Since then, fears about both China total debt load and the size of its NPLs have only grown, and most recently came under the spotlight of the IMF itself, which two days ago issued a warning about Beijing’s reluctance to rein in “dangerous” levels of debt, blaming Beijing’s tolerance of high debt levels on its goal of doubling the size of the economy between 2010 and 2020.

“International experience suggests that China’s credit growth is on a dangerous trajectory, with increasing risks of a disruptive adjustment and/or a marked growth slowdown,” the IMF said. This statement is spot on, because as the IIF recently showed, total Chinese debt/GDP has now crossed above 300%, a level that in every historical instance, led to a financial crisis.

What was left unsaid is that it is only because China doubled its total debt load following the financial crisis that the world managed to avoid succumbing to an unprecedented depression in the years following the financial crisis. However, by engaging on this unprecedented debt rampage, China only delayed the inevitable.

The IMF tried to sound mutedly optimistic, adding that “the [Chinese] authorities will do what it takes to attain the 2020 GDP target,” however one look at the exponential rise in China's various credit product prompts substantial doubt how much longer Beijing can delay the inevitable.

And then there is, of course, the biggest wildcard: how much of China's debt is already impaired, i.e., bad.

* * *

Fast forward to today, when Charlene Chu, described by the FT as "one of the most influential analysts of China’s financial system" is back with a revised estimate that the bad debt in China has now reached a stunning $6.8 trillion above official figures and warns that the government’s ability to enforce stability has allowed underlying problems to go unchecked.

Charlene Chu built her reputation as China banking analyst at credit rating agency Fitch, where she was among the earliest to warn of risks from rising debt, especially in the country’s shadow banking system. Today many of her original views — such as concern about Chinese banks concealing risky credit in off balance sheet vehicles — have become consensus among analysts.

The story repeated with grim determination by Charlene Chu, who left Fitch in 2014 to launch the Asia operation for Autonomous Research, is a familiar one: "everyone knows there’s a credit problem in China, but I find that people often forget about the scale. It’s important in global terms,” Chu told the FT in an interview.

So if Chu held the wildly outlier view nearly two years ago that China's NPLs amount to 21% of total, what is her latest estimate? The number is a doozy: in her latest report, Chu estimates that bad debt in China’s financial system will reach as much as Rmb51 trillion , or $7.6 trillion, by the end of this year, more than five times the value of bank loans officially classified as either non-performing or one notch above." That estimate implies a bad-debt ratio of 34%, orders of magnitude above the official 5.3% ratio for those two categories at the end of June.

Needless to say, there is a solid pushback against Chu's conclusion, and especially those who are currently invested in Chinese financial assets are doing everything in their power to prevent her opinion from becoming gospel.

Chu is among the most bearish observers of China, and some analysts question her methodology. In particular, her estimate of Rmb51tn in bad debt is based on average credit losses across other 11 other economies that previously experienced rapid debt increases comparable to China, including Japan in 1985-97 and the US in 2000-07.

But Chen Long, China economist at Gavekal Dragonomics in Beijing, said this methodology implicitly assumes that an economic crash will eventually occur in China.

Mr Chen argues that credit losses are highly correlated with economic performance: bad loans rise when growth slows. If China can prevent a sharp downturn, credit losses will be much smaller, despite the extraordinary increase in leverage.

Chen's conclusion is delightfully and perversely reflexive: as long as China can avoid a crash, it will avoid a crash: “If there’s an economic collapse, of course there will be massive credit losses. No one disagrees about that. But the issue is whether the collapse will actually happen. She takes that as a given,” he said, adding that Chu failed to consider examples such as Korea in the 2000s or Japan after 1997, when debt rose strongly without harming growth. Which is true, but what Chen forgot to note is that globalsince both of those examples has risen to never before seen levels, in the process making the recurrence of such one-time "success stories" impossible.

Clearly Chen sees a far happier, non "crash landing" ending for the country with the 300% debt/GDP.

As for Chu, she acknowledges that an acute crisis does not appear imminent as the government suffocating influence over both borrowers and lenders has allowed Beijing to delay problems much longer than would be possible in a more market-driven system. One factor that has foiled countless shorts over the years is that Beijing can simply order state-owned banks to keep lending to a lossmaking zombie company or to a smaller lender that relies on short-term interbank funding to stay liquid, and that's precisely what has been happening, when looking at the various non-conventional credit pathways in China in recent years, which include Wealth Management Products, Bank Loans to Non-Bank Institutions, Shadow Banking, Repos and Certificates of Deposit.

But Chu said the ability to avoid recognizing losses only delays the inevitable day of reckoning as problems fester for longer, and grow larger than in an economy where actors respond purely to market incentives. That said, the recent spike in corporate bankruptcies indicates that even Beijing is slowly shifting to a more "market" driven stance.

“What I’ve gotten a greater appreciation for is how everything is so orchestrated by the authorities,” she said. “The upside is that it creates stability. The downside is that it can create a problem of proportions that people would think is never possible. We’re moving into that territory.”

Finally, putting it all in context is the following chart showing the total size of China's financial sector, which as of the latest quarter has grown to $35 trillion, double the size of the US.

If Chu is right, and local savers and investors certainly know best, it would explain why when looking at SAFE data showing "onshore FX settlement" and "cross-border RMB flows”, and which reveals that net flow of RMB from onshore to offshore was another $13.8billion in July , contrary to PBOC reports Chinese outflows have not ceasued since the summer of 2015...

... as a third of Chinese bank assets being "bad" would be nothing short of a "doomsday" scenario for China's financial system and also explains the relentless attempts by local to park their money offshore before the system one day "unexpectedly" crashes.

Chinese economy can only go down with an external trigger. Expansion of internal debt to any extent will not cause China to slow down. It will continue to keep hiding its bad debt till eternity for the Casino to keep running. Of the $34t, today's bad debt is estimated to be $6.8t. This does not bother China as it is its own money printed internally and has no accountability to anyone.

China's economy can only crash when manufacturing, which employs majority of the working class population as well as manufacturing business entities moves out of the country and the western economies go in recession. This is when demand for what the Chinese make will go down and impact millions. This will lead to a stage of internal turmoil.

Of the four categories of the Chinese debt spread over $34 trillion - Financial Sector, Government, Household, non-fin Corporates,

- Household borrowings are mainly for real estate
- Government borrowing is for infrastructure
- Financial Sector is mainly to keep the Stock markets propped up, and
non-financial Corporate debts are the worst created out of over capacity

We have seen in the past whit Japanese stagflation, European recession, ASEAN crisis, none of these impacted global economy in a significant way. Because these economies do not control the flow of dollars. It is only when the Fed decides to recall dollars and squeeze monetary policy, a massive impact on global economic recession will be felt. And the trigger will be either Banks or Sovereign debts or the Derivatives.

Chinese economy can only go down with an external trigger. Expansion of internal debt to any extent will not cause China to slow down. It will continue to keep hiding its bad debt till eternity for the Casino to keep running. Of the $34t, today's bad debt is estimated to be $6.8t. This does not bother China as it is its own money printed internally and has no accountability to anyone.

China's economy can only crash when manufacturing, which employs majority of the working class population as well as manufacturing business entities moves out of the country and the western economies go in recession. This is when demand for what the Chinese make will go down and impact millions. This will lead to a stage of internal turmoil.

Of the four categories of the Chinese debt spread over $34 trillion - Financial Sector, Government, Household, non-fin Corporates,

- Household borrowings are mainly for real estate
- Government borrowing is for infrastructure
- Financial Sector is mainly to keep the Stock markets propped up, and
non-financial Corporate debts are the worst created out of over capacity

We have seen in the past whit Japanese stagflation, European recession, ASEAN crisis, none of these impacted global economy in a significant way. Because these economies do not control the flow of dollars. It is only when the Fed decides to recall dollars and squeeze monetary policy, a massive impact on global economic recession will be felt. And the trigger will be either Banks or Sovereign debts or the Derivatives.

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What is the saturation point for china? US slowly began moving manufacturing out of china.

What is the saturation point for china? US slowly began moving manufacturing out of china.

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China took 30 years (1987 to 2007) to move 30 million workers from heartland to the coastline where all the manufacturing hubs were established. And it took the 2008-2010 recession to send back 3 million workers back home. It caused a significant dent in China's economy. And it was caused by a Lehman and several other that followed. As we speak, there are at least more than 15-20 flash points which are several times bigger than Lehman and are waiting to implode. And all these are directly related to Euro and Dollars. But these have been covered under wraps, similar to the Chinese GDP numbers and its economy.

The saturation point was already created in the last recession and it has never dried since then. This prediction is under no one's control, it will happen when those in control want it to happen in order to achieve their predetermined objective!!

What is the saturation point for china? US slowly began moving manufacturing out of china.

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Chinese economy hasn't reached its saturation point yet and it will take sometime to reach that stage, but the growth rate which CPC wants to attain i.e. 6-6.5% is not sustainable and whatever data they have made public looks fake.

But if CPC doesn't project the 6-6.5% GDP growth rate then the crisis, which is evident, will come earlier. In short CPC is just delaying the crisis, and waiting for some miracle to happen e.g. consumption to increase in world.

Chinese projection themselves show the growth is going to fall down to 4.5 or so in 2 to 3 years time. So why fake it now? The consumption is not going to sky rocket any time soon

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There is a benefit of faking the data or showing fake "gradual" decrease rather than a sudden fall in growth number. Remember how their share market panicked in 2012, this could happen again if CCP doesn't maintain the numbers. Many foreign investor are involved in this and they also want CCP to fake it so that they could leave the Chinese market in phases without creating any havoc.

Also if China fails it will take USA with it as well, hence you'll hear statements from Trump about trade barrier/tariffs and blah blah for political gain but he won't take any step until maximum of USA investors get out of this market and invest their money inside USA, which BTW looks viable for them, but latin america, south asia & asean markets still has much more to offer to the investors.

I have theory in mind, maybe I am wrong but the way I see it there is much wrong with China doing this stupidity. they can't be that dumb.. so it can be assumed they are doing it on purpose...

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You know what, I agree with you. Let me give you (some background and) my logic. There are two types of bubbles - an asset bubble (where assets are created and are over valued) and a debt bubble (where too much money chases the same set of assets) and this is the global situation. There's more but essentially that's the difference.

The end game of such a (debt fuelled) bubble bust is that the people holding the debt lose money massively and eventually get pennies to the $ (eg. Realty in the US in '08) but the assets remain.

China knows it is going to go bust. So it is using its money to buy as many assets (and these are largely good assets - OBOR etc.,), build as much infrastrucure as possible before it goes bust. Once the bust happens - and it will be a global bust (including the US that also have a pretty large debt overhang. Remember a large part of the US (gilt) bonds are held by China), China will be owning a lot of assets that it can then use (post-bust) to consolidate its global heft. Also a lot of people (including US/EU - we seem to have forgotten PIIGS, ME (All the oil fed economies)) will not have much left and there will be chaos.

That is when it plans to stride to the center of the stage as THE won-yand-yonly super-power. Though if we play our cards right, we can beat them at their own game - we can also be there - a kind of andhon me kaana raja ishtyle.

You know what, I agree with you. Let me give you (some background and) my logic. There are two types of bubbles - an asset bubble (where assets are created and are over valued) and a debt bubble (where too much money chases the same set of assets) and this is the global situation. There's more but essentially that's the difference.

The end game of such a (debt fuelled) bubble bust is that the people holding the debt lose money massively and eventually get pennies to the $ (eg. Realty in the US in '08) but the assets remain.

China knows it is going to go bust. So it is using its money to buy as many assets (and these are largely good assets - OBOR etc.,), build as much infrastrucure as possible before it goes bust. Once the bust happens - and it will be a global bust (including the US that also have a pretty large debt overhang. Remember a large part of the US (gilt) bonds are held by China), China will be owning a lot of assets that it can then use (post-bust) to consolidate its global heft. Also a lot of people (including US/EU - we seem to have forgotten PIIGS, ME (All the oil fed economies)) will not have much left and there will be chaos.

That is when it plans to stride to the center of the stage as THE won-yand-yonly super-power. Though if we play our cards right, we can beat them at their own game - we can also be there - a kind of andhon me kaana raja ishtyle.

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Lol the last paras funny.
For my level of knowledge I would give china a decade before it goes burst

Data shows countries that cross 120% have a hard landing (this is without exception). China crossed 120% two years ago. In two years they have gone from 120% to 300%. Add to this - their market is exports and both the EU and US (their primary markets) are already slowing down/headed for a recession - there's talk of a recession a year down the line...
A lot of their investments (Habanatota etc.,) are still to generate returns....

BTW, think of the impact on their two little chicks - those should come home to roost then...

Data shows countries that cross 120% have a hard landing (this is without exception). China crossed 120% two years ago. In two years they have gone from 120% to 300%. Add to this - their market is exports and both the EU and US (their primary markets) are already slowing down/headed for a recession - there's talk of a recession a year down the line...
A lot of their investments (Habanatota etc.,) are still to generate returns....

BTW, think of the impact on their two little chicks - those should come home to roost then...

Would you like to take a second guess.

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Is the 120% you referring to debt to GDP ratio? Because that was crossed way back in 2002 only right?

who all have had read economics would know that the domestic currency has to be more fluid (availability)than the forex.

china has become an exporter only.

all production is in domestic currency being exported (out going) & incoming is in $$$.

slowly they had run out of domestic currency where as $$$ is in very large availability. >>>>>> so they had no option to go for domestic currency loans which again led to further depletion of domestic currency within china.

this loop will carry on till they devalue (then exports will become costly) or agree to high inflation(thenagain exports will become costly) or increase domestic consumption(if the locals have that much income).

they r running a capitalist economy in a communist way ................ just 1 hit & their economy falls like a house made by cards.